Asian summits obscure market milestones

Although regional leaders at consecutive economic and foreign policy summits in Vietnam and the Philippines, joined by US President Trump for the first time, seemingly basked in warm personal relations, concrete pronouncements were absent for financial markets awaiting 2018 direction on pressing macro and structural issues.

Respective Asia-Pacific Economic Cooperation (Apec) and Association of Southeast Asian Nations (Asean) declarations in Da Nang and Manila urged free trade zones and streamlined cross-border banking and commercial entry, as the original Trans-Pacific Partnership members will try to forge a pact without Washington.

China’s influence was clear diplomatically as it defused ongoing maritime spats in the South China Sea and possible condemnation of the allied Myanmar government over the Rohingya crisis, but beyond touting the Belt and Road initiative Beijing refrained from new departures after announcing breakthroughs before in the Xi-Trump bilateral meeting.

Gross domestic product (GDP) growth in Vietnam and the Philippines is above China’s, as both Southeast Asian nations also manage a jumble of political, debt, fiscal and banking system tensions.

Chinese stocks were up 40% on the MSCI Index through October despite economic and financial system warts exposed in the Communist Party Congress aftermath that last beyond the event’s government intervention. Industrial output and exports fell during the month, and fixed asset investment continued at a sluggish 7% pace alongside a 6% drop in property sales.

Money supply expansion was below 9%, the slowest pace in two decades, with October loans half recent monthly totals. Benchmark government bond yields touched 4% as the new Financial Stability Council convened to emphasize prudent monetary policy and systemic risk control.

Outgoing central bank chief Zhou Xiaochuan warned separately of “hidden, complex and contagious” overlaps between conventional and shadow channels as “zombie” state enterprises and local governments continue to add leverage.

Foreign reserves are steady at US$3 trillion and officials claimed “exit” from regular currency intervention, as the US Treasury Department’s latest report echoed other outside experts no longer claiming fundamental misalignment. President Trump, with this evidence in hand and entranced by his “red carpet” welcome in Beijing, acknowledged that the “manipulator” case to trigger trade retaliation has faltered to counter his campaign promise of immediate action.

China is again running current and capital account surpluses, with the latter aided by even tighter curbs on outbound direct investment imposed for “sensitive sector” deals over US$300 million. Fitch Ratings also reported that record foreign bank lines to the mainland, mostly through Hong Kong, reached almost US$2 trillion in the first half, as the authorities dangled the further prospect of majority ownership in domestic counterparts to sustain support during the Trump encounter.

The relaxation would be phased in over years and is designed in particular to stoke takeover interest in second-tier banks heavily reliant on squeezed wealth management product funding.

Apec host Vietnam registered 7.5% growth in the third quarter and is a top MSCI index frontier market on a 25% gain through October. It rose 15 spots to 68th place out of 190 economies in the World Bank’s ‘Doing Business’ global ranking with advances in credit access and minority shareholder rights.

Net foreign portfolio inflows this year are US$600 million after a series of prominent state and private company offerings. Another government stake in heavyweight Vinamilk was divested, and shopping mall operator Vincom, 20% owned by private equity giant Warburg Pincus, was listed last month.

However public debt remains under strain at 65% of GDP, with reform lawmakers refusing to lift the statutory ceiling. Bank bad loan cleanup through the central asset disposal agency is short of the US$3 billion target, as authorities again begin to lower interest rates against the advice of multilateral institutions urging caution.

Philippines President Rodrigo Duterte could marvel at his chumminess with President Trump as well as near 7% last quarter growth on consumption and infrastructure-driven domestic demand, but the MSCI index has underperformed regional peers with a 15% climb.

His war on drugs and “erratic policymaking,” in the common description of investment houses, have not yet interfered with the technocrats in charge of fiscal and monetary policy providing assurances on the deficit ceiling and low inflation.

Nonetheless as Asean gathered for its summit in Manila, the IMF’s Article IV report warned of overheating from a 20%-plus annual credit increase that could eventually meet with heated presidential denial to dent his team’s reputation and remaining equity excitement.

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